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Mumbai: The number of private equity (PE) investors looking to invest in India has shrunk by more than 20% over the last two years, as a tough economic environment and a lack of adequate returns have forced some to rethink their India investment strategy.

One hundred and three domestic funds and 87 global funds invested in the country in 2013, compared with 137 India dedicated funds and 101 global funds that backed firms in 2011, according to VCCEdge, an investment tracker.

Investment firms like Summit Partners and Sherpalo Ventures have gone slow in investing here. Though Summit Partners established an office in Mumbai in 2012, there have been no investments over the last two years. Emails to Summit Partners’ chief marketing officer Joan D. Miller did not elicit any response.

Silicon Valley-based venture capital firm Sherpalo, on the other hand, made its last announced investment in 2012, according to VCCEdge estimates. Partner Sandeep Murthy could not discuss his firm’s current thinking due to a busy schedule.

In October, Navis Capital Partners excluded India from its seventh fund that will focus on investing around $1.3 billion in the South-East Asian region. Kuala Lumpur-based Navis Capital, one of Asia’s oldest private equity (PE) firms, had been active in India since 2004 and backed nine firms in the country. Apart from the lack of adequate returns, factors like lax corporate governance standards have played a part as well, say experts. “India will be a market that continues to attract capital over time but it will also continue to be quite competitive...Corporate governance is an another important issue especially as fund managers seek to increase activism in the investee companies," said Arpan Sheth, head of India PE practice for Bain and Co. Sheth adds that some LPs have also started investing directly which could have a bearing on the number of active funds.

According to Bain and Co.’s India Private Equity Report 2013, PE firms have invested $85 billion in India since 2000. However, nearly 65% of the transactions in India are yet to offer returns as of 2013, and the country has so far returned $30 billion on the $85 billion in investments, the report said.

“Funds that are of the 2000 and 2005 vintage have seen two cyclical downturns. Exits are yet to happen for them and 90% of the funds in India are struggling to raise capital. Since 2012, only about half a dozen funds have successfully raised capital," said Mahendra Swarup, managing director and partner at Avigo Capital Partners, a PE firm.

To be sure, the shrinkage in the industry has been an ongoing process. Between 2009 and 2012, almost one-fifth of funds that were investing in India till 2009 went cold and stopped investing. In 2012, there were 219 active funds in the country in 2012 and 41 funds became zombie or inactive, according to VCCEdge. Roughly, for every five active funds, there is one zombie fund.

The shrinkage of the industry, however, may help rationalize expectations of companies looking for capital. Experts say private equity as an asset class is being challenged for their returns in all markets, with emerging markets being on top of the list and India being no exception. In the last cycle of PE investing we had too many funds and far too much money chasing Indian assets, said Vikram Hosangady, head of transaction services, KPMG India.

Abhay Pandey, managing director of venture capital firm Sequoia Capital, said it’s not extremely worrisome that the investment industry is shrinking. “Investors, though disappointed with overall market returns over the last few years, won’t completely pull away from the India opportunity," he said, adding that most of the limited partners (or LPs in PE parlance) are optimistic about India’s long-term prospects and will continue to invest here.

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